Honeywell didn’t succeed in acquiring United Technologies, but it's still walking away from the pursuit looking like the victor.

The $81 billion maker of thermostats and airplane autopilots on Tuesday announced it was scrapping efforts to strike a deal with United Technologies. The problem, according to Honeywell, wasn't the logic of a combination or the possible antitrust risks -- which it notes didn't concern United Technologies either when it had tried to spark deal talks in recent years. The issue, rather, was United Technologies' unwillingness to engage in negotiations this time around, with Honeywell as the acquirer.

Honeywell was willing to make a bold move to create shareholder value at a time when industrial companies are fighting persistently slow global growth. United Technologies got cold feet. For its part, United Technologies says the regulatory environment has shifted ``dramatically'' in the last year and that customer pushback would also be too great. But points do count for effort here and the contrast between Honeywell's attitude of action and United Technologies' current inaction is glaring.

What Happens Next?

Honeywell investors expressed doubt about CEO Dave Cote's mega-merger strategy. United Technologies will have to prove it can create value without the deal.

Source: Bloomberg

Honeywell's sharp shift in strategy from making small deals and cost cuts to contemplating the biggest ever industrial combination had understandably left shareholders feeling whipsawed. About $4.6 billion had been shaved off the company's market value since news of the United Technologies talks broke (the shares rallied Tuesday). Many are eager to hear more about what CEO Dave Cote is thinking, and they'll get the chance at the company's annual investor conference on Wednesday, as my Bloomberg News colleague Thomas Black notes. But even among the doubts, analysts were willing to give the CEO some credit. Here's Deane Dray of RBC:

Cote has “developed a reputation as a shrewd operator who runs his businesses well, who invests well,” Dray said. “No one is going to say he’s out of his league. He’s earned every right to be in this fight.”

When the CEO who has spent the bulk of his career eschewing and even at times criticizing big deals suddenly wants to start spending, it's time to pay attention. The message across the board from the biggest U.S. industrial conglomerates has been to expect slow growth. Cost cuts are important and necessary, but only go so far and eventually start to reach their limits. The next step for propping up earnings is acquisitions.

Honeywell will be just fine without United Technologies. As we've noted, the company has plenty of M&A firepower and there are a number of other attractive targets -- from Lennox International to Ingersoll-Rand or Pentair. The industrial giant has also reportedly explored a sale of its building-solutions business, which should command a high valuation if recent deals in the sector are any guide.

United Technologies CEO Greg Hayes, on the other hand, will now face growing pressure to show how he intends to create value for shareholders. He's characterized United Technologies as being more of a long-term story. And to a certain extent, that's what industrial companies should be. Short-term gains shouldn't come at the cost of valuable R&D investments needed to carry United Technologies into the future. Big deals don't have the best track record and some United Technologies shareholders may be happy to avoid the distraction of a massive integration with Honeywell, especially when there is work to do within.

Building and Breaking

United Technologies sold Sikorsky, but the momentum from the shakeup is fading and peers are striking bigger deals.

Source: Bloomberg

But against a backdrop where global growth is sputtering along at best and peers from General Electric to Danaher to now Honeywell are seeking big strategic shakeups, it's harder to justify sitting completely on the sidelines. The sale of the Sikorsky helicopter business to Lockheed Martin was a smart move. It was a lower-margin division that didn't fit well with the rest of the company. The positive momentum from the divestiture was drowned out, though, by the repeated cuts to earnings guidance and concerns about margin compression and slow growth. Hayes needs to spell out what's next. We on Gadfly have outlined a number of possibilities -- from some sort of combination with Rolls-Royce to a bid for Honeywell's building-solutions business to a bigger breakup of the aerospace and climate controls divisions.

The advice is free. Standing pat could be costly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.